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Summary - Class notes - Management Accounting 2
1490911200 Hfd 11 - Activity-based costing
Cost smoothingA costing approach using broad averages to uniformly assign cost of resources to cost objects
Product undercostingA product consumes a relatively high level of resources, but is reported to have a relatively low total cost.
Product overcostingA product consumes a relatively low level of resources, but is reported to have a relatively high total cost.
Product-cost cross-subsidisationAt least 1 miscosted product is resulting in the miscosting of other products in the organization.
Refined costing systemThis system reduces the use of broad averages for assigning cost of resources to cost objects, and provides a better measurement of the cost of indirect resources used by different cost objects - no matter how differently the different cost objects use indirect resources.
4 Principal reasons to use refined costing systems1. Increase in product diversity
2. Increase in indirect costs
3. Advances in information technology
4. Competition in product markets
3 Guidelines for refining a costing system1. Direct-cost tracing
2. Indirect-cost pools
3. Cost-allocation bases
Activity-based costing systems (ABC)A refined costing system that focuses on individual activities as the fundamental cost objects. It seeks a greater level of detail in understanding how an organization uses its resources.
Activity-based costing system features1. ABC systems create smaller cost pools linked to different activities
2. For each activity-cost pool, a measure of the activity performed serves as the cost-allocation base
3. Sometimes costs in a cost pool can be traced directly to products.
ActivityThis is an event, task, or unit of work with a specified purpose.
Cost hierarchySuch hierarchy categorizes costs into different cost pools based on the different types of cost driver, cost allocation base, or different degrees of difficulty in determining cause-and-effect / benefits-received relationships.
It distinguishes cost by whether the cost driver is a unit of output or a group of units of a product, or the product itself.
4 Part cost hierarchy for ABC systems1. Output-unit-level costs
2. Batch-level costs
3. Product- / Service-sustaining costs
4. Facility-sustaining costs
Output unit level costsResources sacrificed on activities performed on each individual unit of a product or service. Costs such as energy, machine depreciation and repair fall under this level, because the costs of such activities increases with each additional unit of output produced or machine hour run.
Batch-level costsResources sacrificed on activities that are related to a group of units of products / services rather than to each individual unit of product / service. (Set-costs fall under this level)
Product / Service sustaining costsResources sacrificed on activities undertaken to support individual products or services.
(Design costs fall under this level)
Facility sustaining costsResources sacrificed on activities that cannot be traced to individual products or services, but which support the organization as a whole. It's difficult to find a good cause-and-effect relationship between such costs and the cost allocation base. Examples of general administration costs are rent and building security
2 Key features of ABC systems1. All costs used by products are identified, whether the cost are variable or fixed in the short run. Because the focus of ABC systems is on longer-run decisions when more of the costs can be managed and fewer costs are regarded as fixed and given.
2. The hierarchy of costs are recognized when allocating costs to products. Based on cost hierarchy total costs are calculated first. Per-unit cost are derived after this.
Tell-tale signs indicating implementing an ABC systems could be a solution1. Significant amounts of indirect costs are allocated using only 1 or 2 cost pools
2. All or most indirect costs are identified as output-unit-level costs
3. Products make diverse demands on resources because differences in volume, process steps, batch size or complexity.
4. (Simple) products (easy to produce) show small or negative profits , whereas (complex) products (not easy to produce) show large profits
5. Operations staff have significant disagreement with the accounting staff about the costs of manufacturing, marketing products and services.
Advantage using a ABC system* ABC information is used for pricing, product mix, and cost management decisions.
* Management has greater confidence in the activity and product cost numbers
Disadvantage using a ABC system* ABC information is not perfect because it balances the need for better information against the costs of creating a complex system that few managers and employees can understand.
* Basic ABC systems require many (costly) calculations to determine costs of products and services. (interview, research, data storage, data updating, data reporting).
*Activity-cost rates need to be updated regularly. And very detailed ABC systems are costsly to operate and difficult to validate and understand
* Most ABC systems provide only a small portion of insight of the organization , instead of that of the whole organization
* Theoretical the model is incorrect, because potentially unused capacity is not considered
Activity-based management (ABM)Management decisions that use activity-based costing information to satisfy customers and manage profitability. These management decisions relate to pricing, product-mix, cost reduction, process improvement, and product design decisions.
ABC vs Traditionele kostprijsberekeningTraditionele kostprijsmethoden rekenen kosten toe aan productiemiddelen. Deze kosten veranderen mee met de grootte van de productie. (Bijv. salarissen, productiematerialen en het gebruik van machines)
Activity based costing biedt een aantal voordelen vergeleken met deze methoden:
- Het kostenplaatje per product kan met activity based costing preciezer worden bepaald.
- De berekening via activiteiten levert belangrijke gegevens op voor de kostenbeheersing. Activiteiten vormen zo het aanknopingspunt voor procesbeheersing en –sturing. Met deze informatie kan ook beter beslist worden om diensten in te kopen of zelf uit te voeren, zo kan outsourcing een optie zijn.
- Het kostenplaatje per product kan met activity based costing preciezer worden bepaald.
Methoden voor het toerekenen van indirecte kosten1. Vast / Variabel: single rate / dual rate cost allocation method
2. Afdeling : sirect, step, reciprocal method
3. Gebruikers : stand-alone cost-allocation method, Incremental cost-allocation method
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2. Demand, ordering costs, carrying costs, the purchase order lead time (time between
placement and delivery of an order) are certain
3. Purchasing costs p/u are unaffected by qty ordered
4. No stockout occurs (adequate stock levels are assumed)
5. Size decisions are only considered for costs of quality where it affects ordering or carrying
EOQ ignores Purchasing costs, Stockout costs, and Quality costs
EOQ = √ 2DP/c
D = vraag per bepaalde periode
P = orderkosten
c = voorraadkosten p/st, per periode
* EOQ is to be rounded to the nearest whole number before using the number for other
Note: the square root (√) in the EOQ model reduces the sensitivity of the decision to errors in predicting its inputs.
No WIP appears in backflush costing and detailed tracking of direct costs through each production step to the point of completion is unnecessary.
Backflushing of costs should be triggered at:
* the finished goods stock stage, if a company plans to hold finished goods inventory.
* the finished goods sold stage, if a company plans to hold no finished goods stock.
The trigger points for backflushing relate to the points where stock is being accumulated. As a result backflushing matches the sequential tracking approach and also maintains a record for the monitoring and control of stock.
* The backflush costing system is a standard costing system, not an actual costing system
* If standard costing is used, an up to date realistic set of standard costs is always desirable.
As long as the set meets the cost-benefit test as related to the task of updating.
* The operating environment of JIT have motivated many companies towards more simple
accounting (backflush) and towards abandoning the typical standard costing system
* Backflush is closer to being a periodic system than a perpetual system
* To be considered, backflush costing should generate the same financial measurements as
sequential tracking at a lower accounting cost.
* The choice for a product costing system, depends on the circumstances, the operating
manager's preferences, the underlying operating processes, and the related costs.
1. manufacturing cells
2. multiskilled workers
3. total quality mgt.
4. short set-up and manufacturing lead time
5. selected vendors (=JIT purchasing)
(Werkelijkemarktomvang in aantallen – gebudgetteerdemarktomvang in aantallen) x gebudgetteerdemarktaandeel x gebudgetteerdegemiddeldeverkoopprijs
Hoeveelheidsverschil: (werkelijktotalehoeveelheidgebruikte input -/- toegestanetotalehoeveelheid input) x gebudgetteerdeaandeelpercentage x gebudgetteerdeprijs